What does it all mean? Anyone's guess since as Andrew Wilkinson points out, we don't know who the end users are. Many of the options involved are in the September 1300 to 1400 strike range, but there also a 700 strike September put with OI over 100k... probably just specialist games.. but who knows.
Not everyone on Wall Street is convinced that the worst is over.
In fact, some investors are betting tens of millions of dollars that the market is
headed for a selloff--a major selloff.
The reason: worries about a worsening credit crunch, along with speculation that the Federal Reserve may defy expectations and hold off on cutting interest rates at its Sept. 18 meeting.
So far, over $500 million in so-called put options have been
purchased betting that the benchmark Standard and Poor's 500 index will tumble
anywhere from 5% to 11% in September.
Some investors are even buying put
options calling for 52% decline. A "put" option increases in value as the
underlying stock or index falls.
To put it in perspective, a 5% drop in
the Dow Jones Industrial Average would be the equivalent of 667 points. An 11%
decline would equal 1,468 points. And a 52% drop? You don't even want to know.
The upshot is that some major investors are putting up big money that
the market is facing a major decline.
"There is still fear and investors
are buying crash protection," says Todd Salamone, senior vice president of
research at Schaeffer's Investment Research.
Of course, there are always
investors betting on big declines--they're called bears. What's unusual is the
amount of money being put up on such a doomsday scenario.
in those puts has been a lot more aggressive then we have seen in the past,"
said Bill Lefkowitz, options strategist at brokerage firm Finance Investments.
"Part of it is the environment and volatility where the Dow Industrials can
easily swing over a hundred points during the day, or session to session."
Salamone of Schaeffer's points out that the index options have been "put
dominated over the last several months." And the bets may have as much to do
with hedging portfolios--basically an insurance policy you hope you don't
need--as much as outright speculation.
"We don't know who the end users
of these options are and often they are specialists, pros looking at arbitrage
plays, so the common man doesn't necessarily need to be concerned," adds Andrew
Wilkinson, a senior market analyst at Interactive Brokers. "But it’s a
legitimate build of people wanting protection against the next 10% down should
Whatever the reason, Lefkowitz says worries about what the Fed
will do about interest rates are spurring big investors to buy protection in
case of a major market drop.
"If the Fed doesn't cut Fed funds, the
options market is telling you that the overall stock market will come down
hard," says Lefkowitz. "We could be quickly under the 1400 level of the S&P
500 if the Fed doesn't act."
Fed-fund futures and a variety of market
pundits have been forecasting a 100% likelihood the Fed will lower the benchmark
lending rate, now at 5.25%, meaning there's no room in the market from the Fed
for a surprise.
Lefkowitz also says the activity isn't strictly driven
by money managers looking to protect portfolios. The put options are tempting
enough for speculators to jump in. He says even if the market doesn't fall to
below S&P 1400, the put options could still easily rise in value by "20, 30,
40 percent if we saw another large down day."